March 20, 2017

Deflation Declination and Dungeon Crawling

The other night, my friend BOB!1! and I were discussing current events, in particular, we engaged in a back and forth over the theory that the reason we've seen limited inflation from the various rounds of quantitative easing over the years is that a majority of the inflation they created has been masking a destructive deflationary cycle. This is a disturbing notion as it puts the world economy on a bit of a tightrope.

Those of us of a certain age remember inflation and the memory is not a pleasant one. The inflation of the 1970s was an anomalous event, coinciding as it did with a general contraction of the economy (stagflation).

Inflation is normally an inevitable byproduct and indicator of a growing economy. More economic activity and more money in circulation means that the real value of any unit of money goes down. After a certain point, this actually encourages investment, since inflation reduces the value of money that is just sitting, eventually overtaking any reasonable interest rate. This means that in order to grow or even maintain one's savings one must invest them in moneymaking enterprises. This is hard on everyone, but especially the poor with no savings, those on fixed incomes and the inert, but having that money reinvested in business ventures expands the economy overall, and that increases job opportunities which mitigates some of the problems.

The '70s were unusual due to a series of problems including the fact that the Johnson administration had printed scads of money specifically to devalue the currency just as the first round of World War Two bonds was about to come due, thus effectively cheating the bond holders out of their investments, but freeing up cash for the great society programs. This was followed by Nixon taking the U.S. off the gold standard and printing yet MORE money while the oil crisis damaged the economy by raising the cost of energy and therefore, industry. This was a dreadful situation, but paled in comparison to events like Weimar Germany and Zimbawe.

Inflation is intuitively bad and we have examples of why this is so.

However, except perhaps in cases of runaway inflation like Weimar or Zimbabwe, Deflation can be much worse than inflation.

Deflation is insidious. The value of whatever is currency increases because the amount of money in circulation decreases (is deflated). This is great in the very short term, especially for the poor, those on fixed incomes and the inert. The problem is that over the long haul money actually gains value when hoarded EVEN IN THE ABSENCE OF ANY INTEREST RATE and thus the risk associated with investing with a business becomes exceedingly unpalatable.

People with money cash out, their businesses close which results in fewer paychecks, which further reduces the money supply causing businesses to go bankrupt or their owners to liquidate them before that happens. People hoard, rather than invest money and the economy slowly, over time, comes to a crawl. The tax base evaporates because there is no money and things like roads, bridges, canals, ports and other infrastructure stop getting fixed, further putting a pressure on businesses and the economy. Gradually, over time everything grinds to a halt, and only those with money in personal hoards are in any way well off, their hoards appreciating in relative value as the rest of the world slips into darkness...but such people would be increasingly isolated by the inevitable uptick in lawlessness and ultimately only those who could defend themselves and have access to food would manage to eek through. Of course, with unemployment rampant labor would be cheap, perhaps as cheap as room and board, and such people could probably be put to work growing food in exchange for protection from the rising tide of lawlessness.

Our back and forth at this point took an unexpected turn. What the end state of our worst case scenario ended up in was...

There are ruins EVERYWHERE. There was obviously a great and prosperous civilization (or group of civilizations that shared a transnational economy) and then deflation hit. Most of those dungeons are the hoards of increasingly paranoid rich people who hid their money vaults behind traps and guard animals, eventually, either through the 4 or 5 generation process in which marrying to obtain a dowry self selects for infertility, straight-up inbreeding, or stepping on one of their own damned rot worms, the affluent who did not offer protections to their neighbors or were too autistic to socialize died out and left these "dungeons", ruins of their former mansions and money vaults which have, in addition to their traps, developed their own deadly ecosystems evolved from the guard animals and invasive species.

Feudal lords and the occasional collection of such fiefdoms in a kingdom or duchy, are stable but inherently resistant to change, innovation, and any disruptive developments in thought or technology.

There is only one bright spot economically.

The aforementioned rising transportation costs might serve to juice the economy a tad, but only if the infrastructure was privately owned and only if the return on investment was perceived as good, which might well not be the case with businesses going under left and right. However, an association of businesses in need of transportation services might well band together as a co-op to maintain a transportation infrastructure for their interests and provide mutual protection much like the old Hanseatic League did. These became the guilds. Which are the only (sort of) free market that is not completely the plaything of nobles.

It occurs to me, that there are darker aspects to this too.

As people grow more desperate and fearful, they tend to stay with their own kind, so in many locales, the races self segregated. Those that did not eventually became the "mutts" that are described as human in the game. The differences might be accentuated by starvation selection putting pressure on some groups for small bodies, (Halflings, Dwarves) and in more affluent groups sexual selection favoring beauty (Elves). Such racial balkanization would, in general, be non-conducive to most trade.

However...

What all this means is that adventurers in D&D, whatever level, or even alignment that they are, actually happen to be, by their very nature, saving the world! Everytime they loot a dungeon, they are placing into the economy currency that has not been in circulation in millennia. When adventures begin D&D at level one, the coin of the realm is copper. Then as a party prospers, things get better in whatever locale they frequent and more and better goods become available.

All this money is stimulating trade and competition between the guilds and encouraging wiser feudal lords to invest in and support their resident merchants.

The fact that the most effective parties contain a wide variety of races, classes and skillsets that normally do not interact in any meaningful way only serves to further breakdown barriers put up by an eons long deflationary cycle.

Adventurers ROCK!

So what have we learned today?

Deflation is, in the long run, far worse than all but the worst inflationary events due to its insidious nature and the extreme difficulty in reversing it due to its self reinforcing system on perverse and societally destructive incentives.

Against this, when conducting a risk assessment and cost benefit analysis must be considered the potential for providing future generations with elves.

Although it leads me to wonder if managed deflation can be useful in a society that already has a declining working population (like say, Japan) to help keep the economy and the population in scale with each other.

I used to get really annoyed by the first-generation MMOs like Ultima Online for their claims of a "realistic economy", in which players could vendor unlimited amounts of gold and gems for high prices, while cheap staples remained available in every town. "Realism", in their mind, meant that massive quantities of spell reagents would go on sale every N hours and be bought up by players who camped the vendor so they could grind their magic skills.

3
Excuse me, but what nonsense is this: "Inflation is normally an inevitable byproduct and indicator of a growing
economy. More economic activity and more money in circulation means
that the real value of any unit of money goes down." The second sentence fully debunks the bogus first sentence!

What does it mean, "more money in circulation"? Suppose it means the M2 or other measure of total money supply. Isn't it obvious, then, that it's not created by "growing economy"?

Remember it: inflation is only a measurement of government activity of emission, and that's it. You can have growing economy with inflation or without.

What your long explanations completely miss is the concept of velocity, or productivity of the banking sector. Imagine that you have a responsible government that is not inflating (of course it is impossible, unless you're in Switzerland, but let's run it as a thought experiment). Imagine also that the manufacturing and services are growing, but banking's productivity remains stagnant. You still have clerks with abacuses writing transactions down into gross-boochs. In this case, as you can easily guess, you get deflation, because growing economy needs money. There is no magic inflation that your first sentence presupposed! None! (This situation, BTW, will put a brake on the economic growth, but not because of deflation itself, but because the interest is going to grow.)

But, if we run the same experiment, but have our bankers start using Merchant calculators, and, later, computers, so their productivity keeps up with the rest of the economy, there may not be a deflation. This increase in the banking productivity is known as "increase in velocity".

4
I've never understood the growth --> inflation idea either myself. If you think of money as any other commodity (and it is - it's just the one we do most of our transacting with), then the obvious relationship should be:

Stagflation wasn't an anomaly - economies see inflation when they stop producing goods and services. It's when economies are falling apart that anomalous inflation takes off (Venezuala, Weimar Germany, etc...)

This is (very slightly) complicated by saving and spending. If people start spending their savings, that would lead to inflation and a (temporary) boost in economic output. I imagine this is what drives it, as Keynsians tend to think people spending their savings equates to "economic growth." I sort of does, in the short run, at the expense of security and stability long term.

Posted by: madrocketsci at Fri Mar 24 19:42:18 2017 (VF34g)

5
Pete, your points are solid, however, as a practical matter, an increase in economic activity means that the money supply is increased which generally reduces the value of any given unit of currency. The alternative to this is, as you point out deflation which, as you correctly point out, is an arrestor switch on economic growth. Velocity is a real thing, but it is somewhat theoretical because as a practical matter it is quite rare that banking sectors act without government interference and so as a practical matter, inflation is tied to economic growth. This has been borne out historically, in large part because libertarian economic policies are so rarely tried.
Finally, in my defense, while I am in no way an expert on economics, , the long tendentious, and admittedly incomplete explanation was not a serious economic analysis, but merely a set-up for a silly post about the background of the world economy in Dungeons and Dragons.

March 16, 2017

A Roundup of Links that Caught My Eye

Jerry Pournelle relates an interesting exchange on the Science Fiction Writers of America boards that concerned what, if any, constitutional limits there are on federal regulatory authority. (Yes: "if any"...let that sink in for a minute.)

Refreshingly, it doesn't appear that Hitler was ever invoked. In his stead, Henry the VIII makes an appearance.

Read the whole thing (Scroll down about half a page. It's below the WSJ link.) Note that the conversation was declared...traumatic...and deleted by SFWA.

Trump has a mix of virtues and flaws that make him dangerous -- dangerous to many things, including himself, the country, the GOP, but also dangerous to the current intolerable Standard Operating Procedure of Washington DC.

He's brazen, too rich and too egotistical to be easily cowed by insults and media attacks, impulsive, and ambitious to make a mark. (Observe the large "T's" on the many monuments he's built to himself.)

You don't get many presidents who are not only willing but eager to serve as lightning rods for criticism. He seems to enjoy bad press as much as good press.

This was a guy that few conservatives expected much from, and who will definitely disappoint us on many things. (Trumpcare being one; entitlement reform probably being another.)

But on the first hand -- not the other hand; this hand should be the first to be counted -- he is shockingly willing to defy the established liberal order and propose things that no conventional politician ever would.

Do read the whole thing.

Amongst the campaign promises Trump has fulfilled is the assertion that we'd grow tired of all the winning. I, for one, like a good 70-80% of what he's done, but everytime he opens his mouth I find myself cringing because he appears to have bought up his INT skill PRESIDENT by taking the disadvantage "Utters retarded, terrifying, or potentially dangerous numbnuttery on a roll of 11 or less"

This constant facepalming and unrelenting dread is tiring. Still the winning is nice and the apoplectic reactions of so many of the people who hate my guts and the entrails of any one like me is an admittedly guilty pleasure.

Peter Beinart has an interesting piece which suggests that if you remove the thing that most that holds a society together, feeds the better angels of its nature and restrains its darkest tribal impulses, bad things might happen. Who'da thunk it?

Finally, as a cisgendered honkey male, I'm told I can't have an opinion on the utterly 'woke' Rachel Maddow and her Al Capone's Vault moment. So I'll let these two express it for me.

Note: The linked image encompassing many of the things I like is by Sukabu. The young ladies expressing thoughtful journalistic critiques are from the underrated, yet excellent, Sound of the Sky.

March 10, 2017

CIA documents published by WikiLeaks show that the CIA kept a database of "Japanese style faces” to utilize in online forums.

Exclusive sources (so secret and exclusive that they may not even exist) tell us that in contrast to the impassive public response, the reaction inside Langley to this news was uncharacteristically straightforward...

However, thanks to this completely unexpected development we are now able to accurately recreate the Wikileaks heist of the CIA's secrets!

Have you seen this person?

The database seems to consist mainly of ASCII emoticons. The complete list can be found here.